Archive for the ‘Tax Fraud’ Category

Old Fashioned Theft Leads to New Fashioned Identity Theft

Thursday, January 22nd, 2015

A case out of my old home town of Visalia, California lets us know that sometimes there’s just not much you can do to prevent yourself from being a victim of identity theft. Back in 2011 Rebekah Root either stole documents from an IRS office in Visalia or she obtained them. (The original announcement from the DOJ doesn’t make it clear which is the case.) She then proceeded to commit identity theft using those documents.

TIGTA (the Treasury Inspector General for Tax Administration) investigated the theft, and when they found out that the paperwork was used to file returns on those individuals IRS Criminal Investigation joined in finding the culprit. Ms. Root pleaded guilty last year to wire fraud, making a false claim for a tax refund, and aggravated identity theft. She received 45 months at ClubFed for the $50,000 in fraudulent tax refunds she had claimed.

Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy

Friday, January 16th, 2015

This is for the don’t do this at home file for tax professionals. Kenneth Harycki is the former mayor of Stillwater, Minnesota. He’s also a licensed CPA in Minnesota (but probably not for much longer). Mr. Harycki will provide an interesting lesson the next time I teach ethics.

Mr. Harycki provided accounting, tax, payroll, and bookkeeping services to clients. Back in 2007, he provided services to Model Health Care. From the Department of Justice press release:

Within the first few payroll cycles for Model Health Care (Model), a company controlled by the two separately charged co-conspirators, the defendant concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government. The defendant learned that these co-conspirators had directed that the withheld taxes not be paid to the government and, instead, the taxes would be used for other purposes, including compensating the co-conspirators and their family members and funding other businesses operated by the co-conspirators.

Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Choice (c) is not one that most of us would consider. It is, though, the one that Mr. Harycki not only considered but did:

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

Given that the tax loss is between $1 million and $2.5 million, Mr. Harycki will be heading to ClubFed.

There’s not much to add to the press release. If I discover a defalcation while preparing a return, it’s my responsibility to tell the client. And if my client tells me he’s going to continue the actions, I’m required to quit the engagement. I’ve had to do this once in my career; if I discovered such a fraud I’d make the easy decision to get out the engagement. Apparently Mr. Harycki’s ethics were a bit different than most CPAs and EAs. My. Harycki has received a nomination for the 2015 Tax Offender of the Year, though.

FTC Sponsors Tax Identity Theft Awareness Week

Saturday, January 10th, 2015

Coincidentally (see the previous post), yesterday I received an email from Lisa Lake, Director of Consumer & Business Education of the Federal Trade Commission (FTC). She was highlighting the FTC’s Tax Identity Theft Awareness Week. Happily, this is not a how-to for individuals looking to commit identity theft; rather, it’s a campaign to raise awareness of how consumers can protect themselves from tax ID theft and IRS imposter scams.

Here’s what Ms. Lake wrote:

I thought Taxable Talk readers would like to know about Tax Identity Theft Awareness Week, an initiative led by the Federal Trade Commission taking place January 26-30, 2015.

Identity theft is the largest complaint category at the FTC and, within that category; tax identity theft has emerged as the largest subcategory. IRS imposter scams and similar ruses are a new twist targeting taxpayers. As of August 2014, Treasury Inspector General for Tax Administration (TIGTA) had received over 210,000 complaints with victims losing about $11 million to these scams. The Federal Trade Commission (FTC)’s Sentinel data also shows a significant spike with tens of thousands of these complaints in 2014.

IRS imposter schemes typically work like this:

• Someone calls or emails pretending to be from the IRS
• Scammers rig caller ID to make it look like IRS is calling (may have DC 202 area code)
• Scammers may know the last 4 digits of your SSN
• They may use fake IRS badge #s
• They ask people to wire money or put it on a money card
• Scammers may threaten arrest, deportation or loss of driver’s license
• Sometimes they make a follow-up call pretending to be from DMV or police, also rigging caller id

Your newspaper can help raise awareness about how consumers can protect themselves from tax ID theft and IRS imposter scams. The Federal Trade Commission’s (FTC) Tax Identity Theft Week website (ftc.gov/taxidtheft) provides your readers with tools to do that. We also want to let consumers know how to file a complaint with the FTC; we hope you share the complaint link www.ftc.gov/complaint and the toll-free number 1-877-FTC-HELP with your readers, as well.

Also, there will be a free webinar hosted by the FTC on during Tax Identity Theft on January 27, 2015, at 2pm EST. Consumers can visit ftc.gov/taxidtheft to register and get more information.

I’m all for anything that will put a bite into identity theft. Hopefully this will make a difference.

Tax Fraud on the Wholesale

Saturday, January 10th, 2015

Out of New York City comes allegations of wholesale tax fraud. Seven individuals were arrested on Thursday and charged with conspiracy to defraud the US, conspiracy to commit wire fraud, and aggravated identity theft. Some of the defendants were charged with subscribing to a false tax return. The allegations show a scheme that took inside information and allowed widespread tax fraud. Here’s how it supposedly worked.

One of the defendants worked for the New York City Human Resources Administration as a fraud investigator. He allegedly sold names, dates of birth, and social security numbers to the other members of the conspiracy. They allegedly used their tax practice in the Bronx to prepare thousands of returns with the Earned Income Tax Credit using the stolen identities. This gave individuals a higher refund…and allowed the conspirators to allegedly pocket some of the proceeds. The scheme supposedly ran from at least 2009 to 2014. The conspirators were quite brazen; they allegedly continued with their conspiracy even after search warrants were executed on their business. (Hint: That was not a good idea.)

The scheme intertwined two areas of tax fraud: The Earned Income Credit and identity theft. Both have been repeated topics on this blog.

If found guilty the defendants are looking at terms at ClubFed.

Would the Proprietors of “I Married an Idiot” Commit Tax Fraud?

Thursday, November 20th, 2014

Sometimes you can’t make this stuff up.

Perhaps you missed the website imarriedanidiot.com. The website is down, but thanks to the Internet Archive it will continue to be accessible. I’ll leave it to the reader to peruse the web site.

I saw a brief story on Mark Garcia and Patricia McQuarry in the Pioneer Press. It seems that they not only thought they married an idiot, they committed an idiotic form of tax fraud.

The couple, who are married and were the proprietors of the aforementioned web site, decided to claim to have received “…hundreds of thousands of dollars in 1099-OID income and that the entire amount had been withheld and paid over to the IRS on their behalf.” The couple even put down real bank tax identification numbers on their phony paperwork. Unfortunately, the IRS didn’t detect the fraud until after the fact. Yet it was certain that sooner or later the IRS would find the fraud given that the IRS document matching system wouldn’t match their phony paperwork to real 1099s.

One good fraud deserves another, so the couple then bought real estate and transferred it into a trust titled “POKE-A-BOTTOM.” (No, I didn’t make that up.) Then they were facing foreclosure, so they sent fake tax returns and frivolous documents to their bank. (In all seriousness, lying on a loan document can be a federal felony.) “The documents included fake tax forms and a “Bonded Promissory Note” for $10,000,000, along with instructions that the financial institution should use the document to pay off their $266,000 mortgage and keep the remaining funds.” Somehow the bank decided that wasn’t a good idea. I imagine that the RV and gold coins purchased by the couple with some of the proceeds will be used to pay back the United States Treasury.

The couple will have plenty of time to think of non-idiotic behaviors they can do in the future. There wasn’t anything idiotic about their sentencing for one count each of Conspiracy to Defraud the United States and two counts each of False Claims Against the United States: Mark Garcia received 30 months at ClubFed; his wife, Patricia McQuarry, received 40 months.

From Owning a Party Mansion to Partying at ClubFed

Sunday, September 14th, 2014

Claude Verbal II wasn’t the most well liked owner of a home in North Raleigh, North Carolina. It seems that the 15,000 square foot mansion wasn’t used as a home; rather, it was a place to PARTY! To be fair, the parties appear to have been operated by Mr. Verbal’s ex-wife, Pamela Verbal. The local HOA probably has nothing to worry about as far as any additional parties. Besides an injunction issued by a local court, Mr. Verbal will need to sell the mansion (if it hasn’t already been sold).

You see, Mr. Verbal pleaded guilty earlier this year to a $6,460,962 tax and health care fraud scheme. He was sentenced last week to 135 months (11 years and 3 months) at ClubFed along with full restitution for one count of conspiracy to defraud the United States, one count of aiding and assisting the preparation of false tax returns, one count of healthcare fraud, and one count of money laundering.

In the tax fraud scheme, Mr. Verbal owned a tax preparation franchise with ten locations in North Carolina. Mr. Verbal and his employees offered customers a unique bonus system: If the return was falsified and the client paid cash, he would get a much larger refund. Mr. Verbal and his employees utilized familiar methods: fake dependents and phony credits. Mr. Verbal bought stolen identities so his scheme could continue.

It’s how the scheme was uncovered that makes this quite interesting. From the DOJ press release:

In November 2010, one of Verbal’s employees informed a U.S. probation officer of the fraudulent practices at NBT’s location on Fayetteville Street. The probation officer informed Verbal of this fraud and he falsely denied knowledge of it. Afterward, Verbal took steps to keep the profitable Fayetteville Street location open and to continue operating as usual, but to also further distance himself from the fraudulent practices. In order to do this, Verbal transferred the electronic filing privileges for that NBT branch to a nominee. Verbal and others jointly persuaded a relative of Verbal who allowed Verbal to use their name to apply for new electronic filing privileges for the Fayetteville Street location. In exchange, Verbal and his wife paid the relative $10,000, and the relative had no role in operating NBT, no professional tax experience and no knowledge of the fraud that was occurring at NBT.

But that’s not all. Besides owning a tax preparation firm, Mr. Verbal owned a Medicaid health provider in North Carolina. Mr. Verbal engaged in healthcare fraud, including changing diagnosis codes, inflating the number of clients treated, billing for services not rendered, and faking assessments.

From both schemes, Mr. Verbal used the proceeds to buy luxury goods and possessions, such as his party house in North Raleigh. Many of the items acquired by Mr. Verbal were seized during the investigation, including nearly $766,000 in cash and a 7-carat diamond ring.

As a reminder to anyone who is offered the chance to get a larger refund by paying in cash and having phony items added to his or her tax return: Don’t do it! If it sounds too good to be true it probably is. Not only is knowingly participating in such activities a crime, sooner or later you could get a “Dear Soon to be Audited Taxpayer” letter from the IRS.

It Never Works, But They Keep Doing It

Sunday, September 14th, 2014

“It amazes me that people who withhold payroll taxes and don’t remit them to the IRS can get away with it.” That’s what my friend, Scott Harker, EA, said to me this morning. Yet time and again I read stories where someone decides to abscond with payroll taxes meant for the IRS. It only works until you get caught, and you’re almost always caught.

Take William Danielczyk, Jr., of Oakton, Virginia. If that name rings a bell, it’s because you remember that Mr. Danielczyk was previously sent to ClubFed for two years for illegally funneling just under $200,000 to Hillary Clinton’s political campaigns back in 2006 and 2008. (Mrs. Clinton had no knowledge of the illegal campaign contributions.) When he was sentenced he remarked, “I’ve always tried to lead by example, and I obviously didn’t do that here.”

It turns out that the campaign finance crimes were small in dollars in comparison to his payroll tax crimes. From mid-2009 through 2011, Mr. Danielczyk didn’t send $2,232,781 to the IRS from employee tax withholdings. He also didn’t send employees’ contributions to 401(k) retirement plans to the custodians; that loss was $186,263. Even after he was indicted for the campaign finance law violations he continued with this scheme! That’s chutzpah.

At least the money went to some good purchases. From the Department of Justice press release:

According to court records, instead of paying Innovative’s employment taxes and pension plan contributions, Danielczyk made a variety of purchases from company accounts. Those purchases included $505,871 for the use of an executive suite in the FedEx Field football stadium in Landover, Maryland, along with $40,000 to sponsor the Virginia Gold Cup, a series of Steeple Chase horse races held in northern Virginia.

Mr. Danielczyk was sentenced to eighteen months at ClubFed, three years of supervised release, and must make restitution of $1.6 million to the IRS.

A hint to anyone who wants to try robbing from payroll withholding: Don’t do it! The IRS investigates 100% of these violations. And it’s a certainty that such malefactions will be discovered–sooner or later (likely sooner) someone will be claiming the withheld payroll tax and the IRS won’t match it (as you took it).

If you’re an employer, this is a reminder that you should use EFTPS to verify that your payroll tax withholding has made it to the IRS. If you use employee leasing (aka PEOs), you have to find another method to verify the withholdings but you should do so. Paying payroll tax once is bad enough; paying it twice is really bad.

This Won’t Help Confidence in the IRS

Wednesday, September 3rd, 2014

From South Florida comes a story of one IRS employee who allegedly liked to help taxpayers…just in the wrong way. Charles Corbitt worked for the IRS in West Palm Beach, Florida. He was charged with wire fraud today and is looking at 20 years at ClubFed if found guilty. He’s accused of “helping” taxpayers prepare returns for 2009 through 2012 and making sure they included residential energy credits. There’s just one issue supposedly with those returns (I’m sure you’re ahead of me): Those taxpayers didn’t qualify for residential energy credits. Oops.

Mr. Corbitt allegedly took part of the refund as his fee for preparing the returns. His fee was based on the size of the refund (according to the indictment); that’s a violation of ethics rules. He also allegedly inflated other itemized deductions.

As I said in the headline, the IRS desperately needs some good news…but there hasn’t been much this year.

Tax Preparers Behaving Badly

Sunday, August 24th, 2014

There’s a common thread among these tax professionals: You’ll be getting a refund. That sounds good until you realize that you really shouldn’t have, and that you will likely get in trouble later.

Our first preparer might be saying, “Well, I did get two returns correct.” Unfortunately, the IRS and the US Department of Justice allege he get 74 others wrong. The DOJ asked a federal court to bar Ernice Joseph and his Miami tax preparation firms, Ebenezer Tax Services Inc and Primo Tax Service Inc, from preparing federal returns for others. Why? Here’s what the DOJ states:

The complaint alleges that Joseph and his businesses prepared returns that unlawfully claim the Earned Income Tax Credit by reporting fictitious businesses or business income on clients’ Schedule C – Profit or Loss From Business. Joseph and his businesses prepare returns that claim education and other credits to which the taxpayers are not entitled in order to overstate their refunds. According to the complaint, the Internal Revenue Service (IRS) examined 76 returns prepared by Joseph and/or Ebenezer Tax Services and found that 74 contained a deficiency. The complaint alleges that, altogether, Joseph and Ebenezer Tax Service’s activities may have caused more than $20 million in loss to the U.S. Treasury. In addition, the complaint alleges that the revenue lost from Primo Tax Service’s activities could exceed $25 million.

Our next preparer is one step further along than Mr. Joseph. William Naes of St. Charles, Missouri, was permanently barred from preparing returns for others. Why? Well, things were too good to be true:

The government alleged that Naes prepared returns that fraudulently claimed tax deductions for his customers, including bogus deductions for charitable contributions and unreimbursed employee business expenses. According to the complaint, Naes also fabricated business expenses on Schedules C-Profit or Loss From Business, concocted a fake business for at least one customer and failed to properly identify himself as the paid preparer on many of the returns he prepared.

Neither Mr. Joseph nor Mr. Naes appear to be under criminal indictment; our other two preparers weren’t so lucky. Julius Williams owned and ran his tax preparation business in College Park, Maryland. He catered to temporary workers from Jamaica. His clients got a great deal: Phony Schedule C businesses, phony deductions, phony Earned Income tax credits, and phony education credits led to real refunds. Mr. Williams did one nasty thing to those clients: He stole those ex-clients’ identities to help his current clients. After all, they were back in Jamaica, unlikely to file another US tax return, so why waste a good identity? Finally, Mr. Williams cheated on his own taxes. He pleaded guilty and must make restitution of $1 million; he’s also looking at a term at ClubFed.

Our final Bozo preparer is Daniel Jones of Fredericksburg, Virginia. Mr. Jones operated a business called Tax Doctor Plus. I use the past tense because Mr. Jones will be heading to ClubFed for the next 37 months. He did have a lot of satisfied clients: he used phony tax credits, phony Schedule C’s, phony Schedule A expenses, and phony W-2s to increase his clients’ refunds. He also falsely claimed to be a CPA.

Some common sense applies when you’re reviewing your tax return. First, always review it–don’t just sign it. And if it shows you worked at a business you didn’t or you have a credit for college education expenses when you attended college twenty years ago, there’s a problem. Remember, if it sounds too good to be true it probably is.

A Golden Scheme Leads to ClubFed

Sunday, August 17th, 2014

If there’s one phrase I’ve used over and over on this blog, it’s if it sounds too good to be true it probably is. But greed is a powerful motivating force. For example, consider Yamashita’s gold.

Yamashita’s gold is the supposed booty that Japan accumulated during World War II in the Philippine Islands. Though it’s unclear whether or not this gold treasure really existed, the legend and the hunting for it continue to today.

For a con man, Yamashita’s gold represents an opportunity. Freeman Carl “Buck” Reed told investors he found it (and had also found “gold certificates” worth millions). Mr. Reed raised $1.3 million to get the gold buried in the Philippines. Instead of treasure hunting, the $1.3 million was used for maintaining Mr. Reed’s “facade of wealth.”

Mr. Reed also didn’t believe in filing tax returns. When you have income, that’s a felony. Combined with the fraud, that’s multiple felonies. Mr. Reed was convicted of tax fraud and then pled guilty to the gold fraud. He was sentenced to 87 months at ClubFed (more than 7 years).